Outsmarted

Dressed in a black polo shirt and jeans during an unveiling of his company’s latest market-storming cell phone in August, Lei Jun, CEO of Chinese phone manufacturer Xiaomi, struck a somewhat familiar image. In Chinese tech circles, he’s known as “Leibs,”a reference to his dutiful mimicry of his role model, the late Apple CEO Steve Jobs.

Comparisons between Lei and Jobs are not unwarranted. In the two years since his company was founded, Lei has made Xiaomi a formidable competitor in China’s booming cellphone market, packing his products with enough technology and cult cachet to rival Apple, as well as current handset market leader Samsung, in the domestic market.

As the scale of the Chinese smartphone market advances on its US equivalent, local brands are catching up with their foreign rivals, competing on the full range of cell phone purchase factors: price, quality, specs and even the elusive “cool factor.” In the second quarter of this year, international brands accounted for less than 40 percent of smartphone shipments in China.

Smart Boom

Shipments of Apple, ranked first or second in almost all other regional markets, placed a disappointing seventh among smartphone brands in the first half of this year in China, lagging behind local brands Lenovo, Coolpad, Huawei and ZTE. Nokia came in fifth, while Samsung held onto its top spot.

While shipments of international-branded smartphones saw significant growth, totaling 16.7 million units in the second quarter this year, a 67 percent rise, those of domestic brands in- creased at a much quicker pace, growing more than fivefold to total 25.6 million, according to research firm Canalys. A total of 160 million smartphones, or a quarter of the world’s total, are expected to ship for the Chinese market this year, 141 percent up from last year, overtaking the US as the world’s largest smartphone market, according to industry consultancy IHS iSuppli.

Sales statistics reveal that when it comes to smartphones, traditionally seen as a luxury product, China’s consumers remain particularly responsive to price. Over the second quarter of this year, smartphones priced below 2,000 yuan (US$314) made up about 70 percent of total sales in terms of units, according to research firm iiMedia Research. The low end of the market is largely ignored by international brands like Samsung and Apple, whose products are generally concentrated above 4,000 yuan (US$630).

Chinese handset manufacturers have been pumping out 3G smartphones priced under 1,000 yuan (US$157), or about half the price of their primary models a year ago. Aside from their increasing affordability, their close cooperation with carriers has also helped expand the market share taken up by homegrown smartphones.

Since last year, the country’s three telecom operators China Mobile, China Telecom and China Unicom have been offering generous subsidies to smartphone buyers in order to expand their base of 3G mobile service users. Chinese smartphone user numbers reached 290 million by the end of the second quarter, and the user base is expected to see average annual growth of about 26 percent over the next five years due to the expansion of budget handsets, according to market research firm IDC.

Rise of the Xiaomi

Of China’s domestic smartphone contenders, Xiaomi is undoubtedly the most promising Lei Jun, a former angel investor and dotcom entrepreneur, recently became China’s newest billionaire, and Xiaomi is now valued at US$4 billion, about half the value of declining giant Nokia.

The MiOne (MI), Xiaomi’s first model, sold for 1,999 yuan(US$316), less than half the price of its international-branded rival models of similar specs, and has sold over 3 million units since it was introduced a year ago, with 200,000 orders taken in its first half hour on the market.

“The handset caters to smartphone enthusiasts on low budgets,” said Kevin Wang, an industry analyst with IHS iSuppli.

The biggest selling point of the MI2, Xiaomi’s latest model unveiled this August, also priced at 1,999 yuan (US$310), is its 2GHz quad-core Qualcomm processor, the fastest ever adopted on a smartphone.

A self-confessed Apple imitator, it comes as no surprise that Lei Jun plans to take Xiaomi global. He announced earlier this year his ambition to introduce devices into overseas markets in the second half of this year, with India and Russia as its first destinations.

However, Lei will need more than a black polo shirt and a pair of blue jeans to repeat his success outside of China. Xiaomi has yet to sell a single device in any foreign country, according to the company’s spokesperson Liu Fei, who declined to elaborate on Xiaomi’s expansion plans with regard to other markets. Rumors circulating on various tech blogs point to a push into Europe as early as 2013.

“Lei’s fame might have earned him a crowd of Chinese fans, but Indians and Russians would have no idea who he is,” said Wang, the industry analyst.

Going Global

Other Chinese tech brands are also gearing up to expand their smartphone presence in overseas markets. However, when it comes to smartphones, foreign consumers are particularly brand-conscious.

Lenovo, the Chinese company that builds 14.9 percent of the world’s PCs, said late August that it plans to move its smartphones into India, the Philippines and Indonesia. But while it took the second-biggest share of the domestic handset market in terms of units in the second quarter, the Lenovo smartphone brand remains unknown outside of China.

Huawei, a world-leading Chinese telecommunications equipment maker, has already unveiled multiple cell phones in the US market, and has enjoyed moderate success with low-cost handsets sold through major carriers, such as its Impulse model, which sold for US$29 with AT&T. However, Huawei is struggling to shake off its reputation as a manufacturer of carrierbranded phones for Western operators and establish itself as a brand in its own right.

“Stepping out from underneath the carriers will require significant investment on branding and marketing, meaning a heavier burden on their already suffering margins,” said C.K. Lu, an analyst with Gartner, a tech research firm, in an email exchange with NewsChina.

Legal and patent threats will also be a major risk for Chinese brands once they build a significant presence overseas, according to Lu. Apple’s recent patent lawsuit victory over Samsung should strike a chord with China’s phone makers, many of whose products bear more than a passing resemblance to some Samsung phones.

Lu believes that ZTE, Huawei, Coolpad and Lenovo all have the potential to be significant players in the global smartphone market in terms of unit sales. “But if we look at profit margin and innovation, I don’t think they can reach the level of Apple and Samsung anytime soon,” Lu added.